Netflix needs another hit as subscribers decline in Q1

For Netflix to continue its growth trajectory, it needs another hit on its hands.

Netflix revenues were bang on target for the first quarter of 2017 at $2.64bn. However, the number of subscribers was down slightly on projections.

In the US, the company added 1.42m subscribers (less than 1.56m expected) while internationally, it added 3.53m subscribers (less than 3.7m expected).

This signals that Netflix may need to offer up another hit series, similar to House of Cards.

“Due to content (primarily House of Cards season 5) moving from Q1 to Q2, we had higher operating margins in Q1 (as forecasted) at 9.7pc than our plan for the year (about 7pc),” said CEO Reed Hastings in a letter to shareholders.

“We forecast operating margin at 4.4pc in Q2, placing us on track to reach our 7pc target for the full year. The other effect of the content moves is lower net adds in Q1 compared to prior year (as expected) and heavier net adds in Q2 compared to prior year (about double).

“We have come to see these quarterly variances as mostly noise in the long-term growth trend and adoption of internet TV. For the first half of this year, for example, we expect to have 8.15m net adds, compared to 8.42m net adds in the first half last year,” he said.

Stars of internet TV

Hastings said that the international march of Netflix is continuing in Latin America, Europe and North America as well as Asia, the Middle East and Africa.

The company is continuing to produce its own content, including its first competition show Ultimate Beastmaster as well as the latest in the popular Marvel franchise, Iron Fist. It has also renewed its deal with Adam Sandler to premiere four films exclusively for Netflix.

According to Hastings, original content is the way to go and Netflix recently hired Scott Stuber to lead the original films initiative.

“Our goal remains the same: to offer a variety of new movies that will attract and delight members at better economics relative to licensing movies under traditional windowing.

“Some of our early movies have been successful by this measure, such as the Sandler movies and Siege of Jadotville. Others, such as Crouching Tiger, Hidden Dragon: Sword of Destiny, have not. Scott’s mandate is to increase both the portfolio and the percentage of films that delight many of our members relative to the film’s cost.

“Since our members are funding these films, they should be the first to see them. But we are also open to supporting the large theatre chains, such as AMC and Regal in the US, if they want to offer our films, such as our upcoming Will Smith film Bright, in theatres simultaneous to Netflix. Let consumers choose.”

In terms of the competitive environment with the launch of YouTube TV in the US, for example, Hastings said that such services may appeal to a subset of the same population that doesn’t subscribe to a pay TV bundle.

“But we don’t think it will have much of an impact on us, as Netflix is largely complementary to pay TV packages. Our focus also is on on-demand, commercial-free viewing rather than live, ad-supported programming.”